Monthly Archives: April 2015

Grenville Cross says while the government must make every effort to exercise restraint in the event of Occupy Central, law enforcement officers must nevertheless prepare for the worst

By failing to prepare,” said Benjamin Franklin, “you are preparing to fail.” As the much hyped plan by activists to occupy the Central district, in the hope of forcing Beijing to grant their demands for universal suffrage, draws ever closer, the authorities will be readying themselves. If thousands of protesters occupy Central’s main roads and paralyse the economy, the police, quite clearly, cannot tolerate this. Contingency planning will, by now, be well advanced.

Although Chief Executive Leung Chun-ying and his team have been criticised for describing Occupy Central in advance as unlawful, it would be strange if they did not, given that the wilful obstruction of public places is a criminal offence. After all, civil disobedience involves law-breaking, and, notwithstanding a peaceful intent, there is always a possibility that things will turn ugly. If radical elements hijack the event and resort to force, as happened, for example, in June when the Legislative Council’s chamber was stormed during a committee meeting on new town development, tensions might rapidly escalate.

No government can be expected simply to acquiesce in civil disobedience designed to damage the economy and force change. It is little wonder that some ministers have, to set an example, signed up to Robert Chow Yung’s anti-Occupy Central campaign. They would, in any event, have received legal advice from the Department of Justice as to the status of the proposed occupation, and whatever ministers have said will have reflected the advice given.

The police, of course, will be on the front line, and their preparations are already well advanced. In June, Security Secretary Lai Tung-kwok promised “robust action to uphold the rule of law and maintain public safety and public order”, and anti-riot drills have been held in the Tseung Kwan O Industrial Estate. Worst-case scenarios have been confronted, including the possibility of officers having to face petrol bombs.

During the protests against the World Trade Organisation meeting in the Convention and Exhibition Centre in December 2005, the police mobilised some 9,000 officers, roughly a third of their regular strength, to handle over 10,000 protesters, and a similar deployment may again become necessary.

The Department of Justice, likewise, will be bracing itself. A dedicated team of experienced prosecutors will be necessary, familiar with the public order laws and the human rights judgments, and available to provide the police with urgent advice around the clock.

Once cases arrive for possible prosecution, they will need to be processed as expeditiously as possible, with backlogs being avoided. In deciding whether to prosecute, sound judgment and common sense will be required, over and above the threshold test of evidential sufficiency. After all, even if there is enough evidence, it may not be in the public interest to prosecute, and, where possible, prosecution should be a sanction of last resort.

It would, clearly, not be desirable for the Department of Justice to prosecute thousands of activists, not least because this would clog up the courts for months, if not years. To prosecute large numbers of people would be a logistical nightmare, and tie up prosecutors, police officers and magistrates for weeks on end, to the detriment of the thousands of other cases awaiting trial. Even if, ultimately, convictions resulted, the sentences, in many cases, might well be light, such as a fine, and not such as to justify a large-scale (and expensive) prosecution.

Moreover, mass prosecutions, particularly of young people, could well be counterproductive, with people feeling sympathy for the accused. If a prosecution becomes unavoidable, then it should, where possible, involve the ringleaders and the most culpable, rather than the small fry.

The charges, moreover, will have to be carefully chosen. There will be a wide choice, and prosecutors will need to decide if the suspects should be charged with wilful obstruction of the roads, holding an unauthorised gathering, disorderly conduct, or, if violence erupts, with assault on the police, unlawful assembly and even riot. A suspect may, depending on the facts, be charged with multiple offences.

All these offences are punishable with imprisonment, and, if a case is particularly serious, it may have to be dealt with in the District Court, where a judge can impose up to seven years’ imprisonment, rather than in the Magistrate’s Court, where the maximum is only two years’ imprisonment.

The authorities, however, would be well advised to exercise great restraint, and to use alternatives to prosecution, where possible. In 2011, for example, although 113 people were suspected to have been involved in an unauthorised assembly arising from an anti-budget demonstration, only four of them were prosecuted. The remaining 109 were given formal warnings.

The judiciary, likewise, will need to prepare itself for a possible surge of cases. In 2005, for example, in anticipation of the WTO protests, a special court was arranged at the Kwun Tong magistracy, with flexible sitting times, and, when necessary, it sat in the evenings. A similar court (or courts) will again be needed to process cases initially. Thereafter, the cases can be assigned to the regular courts for trial.

Although the authorities must make every effort to minimise discord and defuse tensions, they have also to maintain the rule of law. Activists cannot expect to flout the law with impunity, particularly if they ignore warnings or seriously misbehave. Provided restraint is shown and the charging of suspects is not rushed into, the authorities will have done all that can reasonably be expected of them.

Both the police and the prosecutors may face great challenges, but, provided they are professional and exercise sound judgment, they will deserve the support of the community as they discharge their difficult duties on behalf of us all.

Grenville Cross SC, an honorary professor of law at the University of Hong Kong, is the vice-chairman of the senate of the International Association of Prosecutors. The views are those of the author

Andrew Collier says a book that blames the US financial crisis on the drop in spending caused by declining asset values should worry China, whose own housing market is at risk of overheating

One of the theories of China’s slowing economy is that it will run into a “Lehman moment”. This is when a single financial institution collapses, threatening the entire banking system, ultimately creating a financial crisis.

The theory has neat predictive power: find the weak links among Chinese banks, pin down a useful measure of financial liquidity – such as the interbank lending rate – and you have a nice way of keeping tabs on the strength or weakness of China’s economy. The problem is the theory may be wrong.

A controversial new book proposes a different measure of looking at the underlying causes of the American financial crisis, one that may be relevant to China. The book, House of Debt, by economists Atif Mian and Amir Sufi, suggests a squeeze on bank lending had little to do with the crisis. Instead, they blame aggressive mortgage lending and a surge in household debt. The collapse of house prices killed consumer spending and thus created the abrupt slowdown in economic growth.

While Chinese households are much less leveraged than the Americans of 2006, their book may have predictive value for China.

First, let’s look at the evidence. The authors’ main point is that the US crisis was consumption driven – and it started long before the Lehman collapse in September 2008. In fact, the National Bureau of Economic Research dates the beginning of the recession to the fourth quarter of 2007. Why did consumption collapse?

The main cause was a lending boom. Global central banks sought safe assets and the No 1 choice was US securities. They turned to a relatively small financial product called mortgage backed securities, advocated by the US government to help homeowners obtain mortgages. To satisfy demand, investment banks packaged mortgage loans into smaller and smaller pieces, or pools of mortgages. These private securitised loans rose to 50 per cent of all mortgage backed securities in 2005 from just 20 per cent in 2002.

The banks were selling hamburger as prime rib. Each one looked relatively safe but taken as a whole they were toxic. As a result, investors underestimated the probability of mortgage defaults and the correlation of those faults.

Where did the banks lend? The authors show that banks and mortgage brokers aggressively targeted low-income, marginal borrowers – precisely the group most likely to default if the economy went sour. With all this cheap money available, American household debt rose by US$7 trillion from 2000 to 2007. Not surprisingly, when housing prices fell, these poorer households lost the most.

The reason this became a national problem is that these poor and indebted households tend to spend much of what they earn – and likewise, when things go bad, they hold on to their cash. As a result of the housing crash, the decline in home values led to a US$275 billion to US$385 billion fall in retail spending, which spelled the death knell to the economy.

The authors of House of Debt show that counties with large declines in net worth – due to the big declines in house prices – cut their consumption by almost 20 per cent. This was almost four times the national 5 per cent decline in consumption.

What can the US financial crisis tell us about China?

Instead of focusing on the Lehman moment, when one bank supposedly took down the financial system, the book suggests a decline in asset values caused the collapse in consumption. Could this happen in China?

It is true that mortgages are less common in China than in the US. But they are increasing. In 2013, the share of property loans to total outstanding loans rose to 20 per cent from 14 per cent in 2005, according to estimates from Nomura, and now totals 10.3 trillion yuan (HK$12.95 trillion). Property loans accounted for 26 per cent of new loans in 2013.

Also, property developers are major borrowers in the shadow banking sector.

As the property market slows, the government continues to promote mortgage lending. In May, China’s central bank asked the banks to give priority in mortgage lending to first-time home buyers. In July, China said it would revive mortgage-backed debt sales after a six-year hiatus. The Postal Savings Bank of China, which has 39,000 branches in the country, said it would sell 6.8 billion yuan of these notes backed by residential mortgages.

Second, while consumption is around one-third of gross domestic product in China, compared with 70 per cent in the US, the crucial issue is whether a decline in real estate values will have the same impact on spending patterns among government and corporate borrowers – where much of China’s debt lies – as it did among US consumers.

It is quite likely that cash-strapped townships are going to be confronted with real estate projects that are worth much less than they thought. As asset values fall, income from land sales will also decline. Thus, they are likely to curtail spending – just as the US consumer did when the equity in their houses was wiped out.

In its just released report on China, the International Monetary Fund described the chain well: “Many strands of the web, moreover, run through the real estate sector. Banks and shadow banks are exposed to real estate directly through credit to developers and household mortgages, and indirectly through the use of real estate as collateral for other loans.

“Local government spending is also linked to the real estate sector, directly through land sales revenue and indirectly through the tax revenue generated by real estate related activity. Given these interconnections, a major shock to any part of the web would reverberate throughout the whole, creating a negative feedback loop that could … amplify the original shock.”

So, let’s stop getting caught up in neat catchphrases about the Lehman moment and focus on the real problem in China – the real estate bubble.

Andrew Collier is a senior fellow in Hong Kong with The Mansfield Foundation

While soaring prices have widened income gaps in major economies, the real culprit for land supply shortages must be tackled: regulatory inertia

French economist Thomas Piketty’s Capital in the Twenty-First Century has made him an instant celebrity in the United States, even though his work hardly caused a stir when it first appeared in France.

The release of his book in the US has coincided with a great deal of public concern over the rising inequality of income and wealth, especially its concentration among a small fraction of the population. This has incited fears about the rise of crony capitalism, inherited wealth and the formation of a 21st century aristocracy. Piketty became an instant darling of the political left.

On closer examination, however, Piketty’s data can be given a totally different interpretation , with critical implications for advanced economies, such as Hong Kong, where home prices have soared.

Piketty’s study consists of three parts. First, he shows empirically that the ratio of capital to income, after falling between the two world wars and during the Depression, has been rising again. This, he argues, is because the rate of return to capital is higher than the growth rate of the economy.

Second, since capital ownership is heavily concentrated among a small minority, inequalities in wealth and income will be ever rising unless checked by wars, natural disasters or taxation of capital.

Third, Piketty calls for a worldwide, coordinated approach to tax capital in all nations so as to check this capitalist tendency. He believes the growing concentration of wealth, especially hereditary wealth, will undermine democratic institutions.

A study of Piketty’s data shows that by far the most important component of capital that has been rising as a share of national income over the period 1970-2010 is domestic housing capital.

Across all eight countries in his sample – Australia, Britain, Canada, France, Germany, Italy, Japan, and the US – the average increase in the ratio of housing capital to income was 186 per cent, while the average increase in the ratio of other capital to income was only 44 per cent – making housing responsible for roughly 80 per cent of the overall increase. The US had the lowest increase in the ratio of housing capital to income.

Even more striking has been the share of net capital income from housing compared with the share from all other sources.

From 1970 to 2010, the share of net capital income from housing in the eight countries increased by 3.4 per cent on average, while the share from non-housing capital decreased by 1.9 per cent on average.

Housing income thus accounts for over 100 per cent of the increase in net capital income in this period.

What is driving these results in the advanced industrialised economies? Housing capital has greatly appreciated in value as a result of rising property prices. The higher cost of housing is mainly due to higher residential land values rather than elevated construction costs for the structures.

High-density living in major metropolitan centres today accounts for the lion’s share of the increase in the value of housing capital.

As housing has become relatively more expensive, both its aggregate value and its share of household expenditure have risen across countries. This is a condition the people of Hong Kong are very familiar with.

Most people in Hong Kong blame Tung Chee-hwa and Donald Tsang Yam-kuen for slowing down development. Photo: SCMP [1]

Hong Kong is again very familiar with this condition. Most people in Hong Kong blame Tung Chee-hwa and Donald Tsang Yam-kuen for slowing down development. Others see property developers lurking behind the scenes, influencing their decisions.

But is this the correct interpretation? Why are the eight countries studied by Piketty all suffering from this same condition?

The economics literature on markets with high housing costs finds that these costs are driven in large part by artificial scarcity through land use regulation.

In Hong Kong, we all know there is plenty of land. Regulation and politics have made it difficult to develop this land.

We have plenty of industrial land but no industry; plenty of agricultural land but no agriculture; and vast country parks that most people at best visit only occasionally each year.

A natural first step to address disproportionately rising housing wealth would be to re-examine the regulations to expand the housing supply.

Landlords and property developers have benefited from these regulations, and policymakers have taken the blame.

But these regulations were imported from Britain over a century ago. The real cause behind escalating housing prices everywhere is regulatory inertia.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong

Hong Kong’s three-year-old minimum wage has been ineffective and done little to alleviate poverty, despite its popularity among the city’s politicians

Concern about the ability of markets to provide income equity for the least able members of the workforce has given the minimum wage its strong social appeal.

Statutory minimum wages were first introduced in developed countries to control the proliferation of inhumane work conditions in sweatshops.

Today, they target workers in most low-paid fields of employment in more than 100 countries.

Most economists oppose minimum wage laws because they increase unemployment – particularly among workers with very low productivity owing to inexperience or handicap – and therefore fail to reduce poverty.

Supporters say they increase the standard of living of workers and reduce poverty.

But if economic and social policy is going to be decided in the interests of the public, it is essential that empirical evidence be brought to examine whether the objectives are being met as intended or not.
The minimum wage’s main outcome is to distort labour market decisions

Hong Kong enacted a minimum wage law in May 2011. Has this helped low-income households and reduced income inequality?

A preliminary answer to this question can be gleaned from the data in the General Household Survey. Data in the four quarters before and after the minimum wage became effective was examined.

In the four quarters before May 2011, an estimated 233,000 households (or 10 per cent of all households) had at least one member who qualified for the minimum wage.

In the four quarters following the introduction of the minimum wage, that number was halved to 121,000 (or 5.1 per cent of all households).

This, according to the advocates, demonstrates the success of the minimum wage in helping workers with low pay.

But is this really the case? A more interesting result is the distribution of minimum-wage workers across households by income quintile groups.

[1]If most of the minimum-wage workers came from the bottom 20 per cent of households by income, then we could safely conclude that the legislation was achieving its goals and that the minimum wage was alleviating poverty across households.

But the data (see chart) shows that one year before May 2011 only 26.6 per cent of the households with a worker qualified to receive the minimum wage came from the lowest income quintile.

One year after the minimum wage was introduced, an even lower 20.2 per cent could be found in the lowest income quintile.

In fact, workers who qualified for the minimum wage were fairly spread out among all households, with substantial percentages found even among the top two income quintiles.

Prior to May 2011, there were a combined 22.5 per cent of households with minimum-wage workers among the top 40 per cent of households by income, and after May 2011, the top two quintiles’ share in fact increased to 24 per cent.

Many households, including many middle-income households and some high-income ones, have a member with low pay and low productivity.

Similar findings have been found in the US, Britain and Canada. So Hong Kong is not special and is part of a general pattern commonly found elsewhere.

It is a mistake to believe that the minimum wage helps low-income households. As a policy instrument for alleviating poverty, its effects are too diffused among the population to be useful.

However, it is not difficult to understand why the minimum wage is favoured in so many countries. It provides governments with a low-cost policy ( since it does not require government expenditure outlays) with which they can claim they are addressing the problem of poverty.

Illustration: Lau Ka-kuen [2]It also provides politicians and union leaders with a convenient instrument to secure votes and support in their constituencies.

But politicians and officials should face up to the true effects of the minimum wage when it is reviewed later this year.

It is an ineffective solution for addressing poverty, and its main outcome is to distort the labour market decisions of employers and employees.

The only sensible response is to stop pretending it helps poor households. Let us stop wasting precious time on this ineffective policy.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong

Laurence Scofield says delayed cultural district will prove to be a good return on investment

Impatience over long delays is giving way to doubts that the West Kowloon Cultural District is even needed.

“What for? For people to shop in?” a leading book publisher recently asked.

One of Hong Kong’s most respected business news columnists, Jake van der Kamp, just the other day branded it a “wastrel project” and urged Hong Kong to “chop it all”.

Is this right? Is it really the wasteful, good-for-nothing effort this name implies?

If you believe that the arts will add only limited value to Hong Kong’s future, then it certainly is. But if you believe in the power of the arts to attract overseas firms to Hong Kong and improve the quality of life for those already living here, it is not.

The attack on West Kowloon from a business angle is particularly strange.

I am a US-born businessman who’s lived in Hong Kong for almost 40 years. Based on my experience, I believe an overwhelming majority of newly arriving business people find Hong Kong a far more agreeable and attractive place to live and work today compared to the time when – not so many decades ago – it was designated a hardship posting by overseas investors and widely considered to be a “cultural desert”.

A study by the business consultant McKinsey found that enterprises consider the cultural and social environment a key factor in locating executives. Hong Kong’s existing lead in the cultural sphere over other cities confirms McKinsey’s point. Ask yourself how many Hong Kong expats you know would prefer to live in Shenzhen, Beijing, Kuala Lumpur or Taipei instead?

Despite the many attractions of these other cities, Hong Kong and its far more sophisticated lifestyle (of which the arts is a key part) would be the first choice of most people I know.

Even if we look at these things from a purely business point of view, money spent on the arts makes sense. It has a good return on investment. Former BBC World Service managing director John Tusa estimates that the arts in Britain generate £6 of economic activity for every £1 invested in the sector.

But judging the value of the arts just from a business point of view would be much too limiting. Even far greater in importance is the ability of the arts to transform the whole of society and make it a better place to live as we pursue our hopes and dreams.

Hong Kong’s economic success is undisputed and psychologists have long recognised that economic progress changes people’s goals and needs. In poverty, their quest is for food, shelter and freedom from physical harm, but with rising affluence human beings’ needs include affection, friendship and a sense of achievement.

Psychologist Abraham Maslow famously described it this way: “A musician must make music, an artist must paint, a poet must write, if he is to be ultimately happy. What a man can be, he must be. This need we may call self-actualisation.”

What’s true, good, and meaningful in life – these are questions the arts explore and they are a fundamental part of humankind’s quest for a better understanding of itself.

Admittedly, not everyone understands this right away. Besides denouncing West Kowloon as a “wastrel project” van der Kamp sees little to recommend our existing arts infrastructure. He found things “mostly pretty dull” when he visited the Hong Kong Cultural Centre, currently our leading performing arts venue.

He may have gone on the wrong nights. Some of the world’s top musicians, singers, directors, actors, dancers, choreographers and orchestras have trooped across its stages.

Or, quite possibly, the venue itself could be the reason he was bored. Many people would agree with his description of the Cultural Centre as a “sterile, barren place”. And this is why the new facilities in the West Kowloon Cultural District are so urgently needed.

The Foundation for the Arts and Music in Asia has found Hong Kong audiences enjoy its cultural programmes much more in the better of two theatres – even if those two theatres are showing exactly the same programme.

A special venue lends excitement to a performance and brings in new members of the audience. Many people have been to see their first opera because it was performed in the acclaimed Sydney Opera House.

Will the West Kowloon Cultural District achieve that level of renown? Let’s hope so. In the end, I suspect all the squabbling over delays and money will be forgotten and the aims of this ambitious project will have a chance to be realised – just as the innumerable criticisms in the 1960s of that iconic Australian landmark have been forgotten.

It will be money and time well spent if it helps new generations of Hong Kong people to explore the path on which the arts takes us to the well lived life.

Laurence Scofield is chairman of the Foundation for the Arts and Music in Asia, a Hong Kong-based not-for-profit group providing scholarships for Hong Kong music students and music education programmes for grassroots communities